Statement of the American Federation of State, County and Municipal Employees, AFL-CIO

The American Federation of State, County and Municipal Employees (AFSCME) submits the following statement on President Bush’s Unemployment Administrative Financing Reform Initiative for the March 5, 2002 hearing record of the Human Resources Subcommittee of the House Ways and Means Committee.

As a participant in the multi-year unemployment insurance (UI) “stakeholder dialogue,” AFSCME is deeply disappointed that the current Administration has abandoned the fundamental premise of that process:  that unemployment insurance reform can best be achieved when consensus is sought among the key stakeholders in the system.  The consensus reform plan reached in June 2000 represented a remarkable achievement at the federal level.  Although stakeholder negotiations occur at the state level, never before had such a process occurred in Washington, much less produced a consensus. 

The stakeholder package was a fair and balanced compromise among competing interests.  It contained something of importance for each party, but not every change sought by the participants.  For workers, it required that states implement an alternative base period and cover part-time employees and provided federal funds to pay these benefits.  For states, workers and employers, it provided increased and dependable funding for state unemployment insurance and employment service (ES) operations.  For employers, it repealed the federal unemployment insurance (FUTA) surtax.

Unfortunately, opposition by some business groups at the end of the 106^th Congress stopped consideration of this package.  Now the Administration has sent to Congress a one-sided plan that abandons the progress made during the stakeholder process.

The Administration plan would phase down the federal FUTA tax by 75 percent in five years.  It would shift the responsibility for UI and ES administrative financing to the states over the five-year period, leaving the federal government with responsibility only for the federal-state extended benefits program and the loan account and transferring to the states a new annual financial responsibility of over $3.5 billion.

This devolution plan can in no way be regarded as a comprehensive employment security reform.  It gives employers a $36.5 billion tax cut over 10 years, but it does nothing to address the need to expand the percent of unemployed workers receiving unemployment benefits.  In calendar year 2000, this “recipiency rate” was only 38 percent nationally and ranged from a high of 73 percent in Connecticut to a low of 16 percent in New Hampshire. 

The absence of any reforms to address recipiency rates is not just disappointing.  It also is alarming.  The low percent of the unemployed who receive benefits compromises the program’s countercyclical effectiveness and has rendered the federal extended benefits (EB) program increasingly less relevant.  Because the EB program is triggered by the insured unemployment rate (IUR), which measures the number of individuals who receive basic benefits, increasingly it fails to reflect the nation’s overall pattern of unemployment.  Thus, reducing the IUR from five percent to four percent, as proposed by the Administration, is not a satisfactory solution to improving the extended benefits program.  State benefit policies also must be modernized to reflect the changing composition of the workforce, including the growth of low-wage, temporary and part-time employment.

Worse yet, we believe that the Administration’s devolution plan will harm workers and further weaken this important safety net program in several ways. 

First, it will create new downward pressure on state benefit policies.  This is because the proposal eliminates the current “firewall” between administrative financing, which is a federal responsibility, and benefit financing, which is a state responsibility. 

Currently, state policymakers balance two competing pressures, those from employers to minimize taxes and those from worker advocates to improve state benefit policy.  The devolution plan will add a third claim on state taxes and resources – the need for administrative funding.  Inevitably, employer pressure to keep taxes down, combined with state needs to maintain an adequate administrative structure, will lead to cuts in benefits or rejection of much needed worker improvements.

There is very good reason to believe that state benefit policy will be caught in this vise.  Despite the 1990s economic expansion, states failed to strengthen their benefit policies while employers reaped substantial benefits.  Between 1994 and 2000, for example, tax decreases took over $47 billion out of the UI system while recipiency rates hovered at an all-time low of about one-third of the unemployed.

 The Bush devolution plan also undercuts the primary enforcement mechanism for federal protections for workers.  Currently, as a condition of receiving federal administrative grants, states must maintain proper and efficient administration, pay benefits accurately and promptly “when due”, and provide a fair and impartial hearing process.  Without any federal funding of state operations, the appropriateness of federal standards for the use of state funds will certainly be challenged.  Furthermore, it is highly doubtful that the federal government would raise employer taxes by eliminating the tax-offset credit in nonconforming states as the Administration has proposed.

  AFSCME strongly believes that there is an administrative underfunding crisis.  Severe underfunding means workers do not get benefits paid in a timely fashion and do not get the reemployment services they want and need.  Furthermore, underfunding has led states increasingly to rely heavily, if not exclusively, on telephone claims systems or other electronic methods, which do not adapt easily to sudden surges in volume or to the complexity of disputed claims.  In addition, because states are not fully reimbursed for their workload, it is possible that federal underfunding may constitute another rationale for not improving state benefit policies to cover more unemployed workers.

However, even as a solution to this problem, the devolution plan falls short in our view. 

In the first place, although the Administration intends to transfer $14 billion from the federal trust fund into state trust funds during the five-year transition period, there will be no federal administrative funding after that.  This means that states will have to rise over $3.5 billion annually in new state revenue simply to make up for the loss in federal funding.  

The Administration maintains that, because federal FUTA taxes will be reduced by six-tenths of a percent, states should be able to finance their administrative costs without employers experiencing a tax increase.  There are several fallacies to this analysis. 

Employers do not regard two-tenths of the six-tenths as a source of revenue for the system at all because they consider it an outdated and unnecessary surtax that should have expired long ago.  As a result, states could only be able to reclaim four-tenths without raising employer taxes beyond what employers might be willing to accept. 

In the aggregate, the four-tenths tax would have raised $3.5 billion in FY 2001.  That is only about $300 million more than the FY 2001 federal appropriation, a level which the states have said is inadequate.  The amount is actually less than states have been receiving during the current recession.

For individual states with high recipiency rates, the picture is worse.  For example, Connecticut’s federal administrative grant was $57 million in FY 2001, while a four-tenths tax on its employers would have raised only $44 million.  Other states, such as Pennsylvania, California, and Michigan, would be in the same situation.

The current administrative financing system more accurately reflects state workload needs and is countercyclical in nature.  It also pools risk nationally.  First, administrative funds are allocated among the states according to their share of UI claimants and employer taxes collected.  Second, there is a federal mechanism that automatically releases additional administrative funding if national unemployment rises above expected levels and the number of claimants rise.  Both of these features would be eliminated if the federal administrative financing responsibility ends.  Individual states could not easily replicate these features.

The fact that a four-tenths unemployment tax would not have yielded as much as the current system has sent to the states during the current recession graphically demonstrates the bind states in which may find themselves.  Unless the states build adequate reserves during economic expansions, they will not be able to increase their administrative resources easily when claims surge during recessions.  That means they may have to borrow from the federal loan fund at six percent interest (or whatever the rate at the time might be), thus unnecessarily increasing the cost of their operations.

The track record of the states does not inspire confidence that they will handle this new financial responsibility prudently in all cases.  As noted earlier, states were much more eager to cut taxes than strengthen their benefit systems even when a robust economy would have made doing so much easier.  Furthermore, some states have mismanaged their benefit trust funds by failing to build up adequate reserves and choosing instead to give their employers tax cuts.  Most notable are New York and Texas, which will be borrowing $1.5 billion from the federal government because their benefit trust funds are running out of money.

The essence of the Administration’s plan is to cut employer taxes and to pass the responsibility for administrative funding off to the states.  While it may be a “new balance,” it is no meaningful solution to the problem.  A far better solution would be simply to request additional appropriations for FY 2003.  Even better would be a return to the stakeholder framework, with its administrative funding mechanism that would release adequate funds based on workload as a mandatory expenditure.  For FY 2003, it would guarantee states an additional $1 billion in federal appropriations, instead of giving them the “opportunity” to levy a four-tenths increase in state employer taxes that would raise only $300 million more.

The release of $8 billion in Reed Act funds as part of the economic stimulus bill has given states a unique opportunity to address the administrative underfunding problem and weaknesses in state benefit policies.  The Reed Act money should give the states ample resources for many years to come if they use it wisely.  In our view, it obviates the need for the Administration’s misguided devolution plan.  AFSCME strongly urges the Committee to monitor closely how states use their Reed Act funds and to refrain from considering the Administration’s proposed administrative financing proposal.